Call GST Council meet

Problem of states' dues needs co-operative settlement

Union Finance Secretary Ajay Bhushan Pandey has reportedly told the Parliamentary Standing Committee on Finance that the Union government is in “no position” to pay the state governments their agreed upon share of revenue from goods and services tax (GST). GST was introduced on the undertaking that states would be compensated for lost revenue, if any, by the Union. This undertaking embedded the assumption that revenue would grow 14 per cent year-on-year. The influence of the pandemic and the associated lockdown on overall government revenue has, however, led the Union finance ministry to reassess its position.

The question of denying states their share will no doubt be raised. Mr Pandey’s position is that the GST Act permits a reworking of the formula by which compensation is paid to the states if revenue collection falls too far. On Monday, the finance ministry said the final instalment of the past year’s GST compensation had been released to the states, totalling almost Rs 14,000 crore, taking the amount released for the year to Rs 1.65 trillion, over Rs 70,000 crore more than the amount collected as compensation cess. The government was able to do this partly by dipping into what it had held on to from the compensation from the previous two years. That, of course, is no longer a possibility. The Union government also had recourse to the integrated GST cash it had on hand ― which in any case was due to be allocated to states.

Some reports have suggested that the government is considering taking out a loan against the future stream of revenues from compensation cess. This may not be a viable plan. The alternative is to increase the compensation cess on certain products — but, in the middle of a downturn, this is hardly going to be politically palatable. Also, an increase in cess may not be sufficient to compensate the states. Other ways out may need to be found. For example, the criteria given for states to raise their own borrowing cap in this year may now be considered too stringent and could be relaxed. What is certain is that the Union government can neither let this issue slide much longer, nor can it come to some conclusion on what must be done on its own. States need some clarity on their dues, so they can form spending plans.

The state governments are on the front line in terms of responding to the public health needs of the pandemic, providing relief to those affected, and nurturing a recovery. They cannot be starved of finances at this crucial time. The Union government cannot shirk its responsibility to live up to its commitments. In any case, no renegotiation of its commitments, even at this moment of crisis, can happen unilaterally; the GST Council would have to meet and agree. But the scheduled July meeting of the Council has not taken place. This must be a priority for the government. Even if it has, as yet, no plans on how to raise the funds that states are due, it must take the state governments into confidence. This is a shared crisis, and a solution must be found co-operatively.